Treasury, Fed near compromise on consolidation.

WASHINGTON -- The Department of the Treasury and the Federal Reserve are nearing a final compromise on consolidating the nation's bank regulators, Federal Reserve Board Governor John P. LaWare said Thursday.

Mr. LaWare also said that while Congress need not take action to regulate derivatives, bank management must "have a thorough understanding of the instruments and how they are being used."

"There is substantially no difference between us and the Treasury people at this stage," Mr. LaWare said of the agency consolidation matter. "It is truly a matter of technicalities."

Mr. LaWare refused to discuss which sticking points remain in the consolidation talks, how long they might take to solve, or whether the Fed and Treasury had reached an agreement on how bank supervision would be paid for under the proposed Federal Banking Commission.

He did say Treasury and the Fed have encountered delays because they seek to send Congress precise legislative language on the matter. Because of Congress' busy schedule, "I don't know whether there is time to get it passed this year," Mr. LaWare said, adding, "I hope so."

Asked whether he thought credit unions should have been included in the consolidation proposal, the central banker said, "They are politically untouchable."

Mr. LaWare said Congress should not regulate derivatives, which are complex financial contracts whose returns are derived from the performance of currencies, interest rates, or commodities. "Derivatives are not new, they are not mysterious, and if managed properly, they are not particularly dangerous," Mr. LaWare said.

Still, directors at companies that use derivatives "better know what the nature of these risks are," Mr. LaWare said.

"It is certainly reasonable to assume that exotic - or at least exotically named - derivatives are riskier than single-family mortgage loans," he added.

"It does not follow that they are therefore unmanageable and should be prohibited to banks, or even more ridiculous, that the only ones who understand derivatives are members of Congress who can set the world right by yet another legislative adventure in micromanaging the banking system," he said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER